Paras Defence and Space Technologies Ltd IPO - A hit or a miss?

​​​​​Did you know India falls in the top 5 for its defence expenditure in the whole world! The government has been funding incumbents like DRDO, the Indian Armed Forces, and ISRO, which have been the torchbearers of the defence and space sectors for decades now. It’s no sorcery that the companies catering to the requirements of these institutions have evolved alongside the industry’s growth.

One of such companies is Paras Defence and Space Technologies Limited. Well, after an aggressively oversubscribed IPO from a similar machine industry company (MTAR technologies ltd), this is another IPO from an unusual sector.

So yeah, hold on as we explain the attributes of the industry and company to you and help you make an informed decision regarding the IPO.

About the company

Paras Defence and Space Technologies limited (PDSTL) is involved in designing, developing, manufacturing, and testing a wide range of defence and space engineering products and solutions. Fancy stuff!

The company is a leading player in the ‘Indigenously Designed Developed and Manufactured’ category and provides its services to four major segments of the Indian defence sector (discussed later).

The company has two plants, both in Maharashtra. The one in Ambernath is used for heavy engineering products, and the one at Nerul is used for optics, defence electronics, and EMP solutions activities. It is planning a heavy Capex in these plants.

Currently, the company has four subsidiaries, none of which are involved in R&D, and they directly offer products to their customers. The subsidiaries are Paras Aerospace, Paras Anti Drone, Opel Technologies & Paras Green optics.

The company has a well-qualified and experienced management team led by the promoter, Sharad Virji Shah, the Chairman of the Board & Munjal Shah, the Managing Director.

Revenue streams of PDSTL

Let’s look into some of the primary revenue sources of this company through five categories of product offerings:

• Defence and Space Optics

The company develops high-precision optical instruments for defence and ‘thermal imaging’ and ‘space imaging’ for space. Sounds so cool, isn’t it!?

• Defence Electronics

Under this segment, the company develops a wide array of high-performance computing and electronic systems for border defence, missiles, tanks, etc. (Like robots, much?)

• EMP protection

PDSTL develops, designs, manufactures, and commissions various solutions for EMP Protection. Now you may be thinking about what EMP means. (Finology at your service!) So, EMP is an Electromagnetic Pulse protection system that protects electronics appliances from high-frequency EM radiation. These EM radiations intend to make these appliances inoperable. 

• Heavy Engineering for Defence

The company provides heavy engineering products and solutions, such as components for rockets and missiles. Let’s go to the moon, shall we? (Just kidding!)

• Niche technologies

Finally, they provide advanced technologies in the defence and space sectors.

Going forward, the company intends to grow more in the optics segment as they gain higher margins there.

Client base of PDSTL

The Government of India is the company's primary customer. (Wowzah!) Most of the deals are scheduled with any PSU or defence company. Along with that, the company has private clients too. PDSTL gains approximately 15% revenue from its exports. Their primary export partners are countries like Israel and South Korea. Recently, the company has received a few orders from the USA and the UAE.

Some of its Public Sector clients include Bharat Electronics Limited, HSL, Bharat Dynamics Limited, etc. While TCS, Alpha Design Technologies, AstraRafael Comsys Pvt. Ltd and more in Private space. Internationally, its clientele includes Advanced Mechanical and Optical Systems (AMOS), Belgium, Chaban (Israel), Tae Young Optics Company Limited (South Korea), Green Optics (South Korea), and a lot more. Now, this is a generous amount of awesome!

Financials of PDSTL

If you have a look at the financials of the company, assets have been growing every year, and the company is ready for more Capex in fixed assets. Revenues of PDSTL have decreased due to Covid-19, as the company’s plants were completely shut down for a few months during the lockdown, and production had to stop. (We all know the suffering!) The majority of the company's payments happen in the last quarter of the financial year.

(Source: Paras Defence and Space Technologies Ltd)

The order book of the company looks rock solid. The Management stated that they currently have an order book of ₹300 Crs pending, which will be completed in the next 18 months. So according to the order book, the company is growing rapidly, which is a good sign!

IPO details

For more details about the IPO, you can visit the IPO section in Ticker -

Objects of the IPO

• The company is planning capital expenditure in plants at Ambernath and Navi Mumbai, and for this purpose, they are to buy new machinery.
• As Working Capital cycles are too long, this company needs additional funds to manage them.
• To pre-pay the loans. Currently, long-term borrowings stand at ₹63.32 Cr.
• And for other general corporate purposes.

Why should you invest in PDSTL's IPO?

• The company has a well-diversified product portfolio and revenue streams. Paras is one of the few high-precision optics manufacturers in India’s space and defence applications.
• The company offers a one-stop solution for a variety of products. Their IDDM model is robust. (IDDM means Indigenously design development manufacturing)
• The company has strong R&D capabilities. Important stuff!
• It is capable of undertaking turnkey projects in defence and EMP protection solutions.

What are turnkey projects? A type of project that is constructed to be sold to any buyer as a completed product. E.g., a construction company builds a plant for a footwear company with all the given specifications. Finally, when the project gets completed, they just hand over the key to the footwear company.

• The company has no domestic competition in most of the areas it works in. Although there are international peers to worry about, yet government initiatives like ‘AtmaNirbhar Bharat’ and ‘Make in India’ are proving beneficial to the company.
• The Indian government is boosting exports of defence equipment.
• Production Linked Incentive (PLI) Scheme introduced by the government for Auto Industry and Drone Industry to offer tailwinds to company’s progress.

Risks factors in PDSTL

• The majority of Paras’ revenues come from its top 5 clients. Top 5 customers constituted 72.27%, 58.65% and 75.58% of their revenues in 2020, 2019 and 2018 respectively. This reflects heavy dependency on just a few clients, and any adverse developments might affect its topline.
• The Indian government is one of the main customers of Paras in different business verticals. Thus, failure to comply with their requirements may affect the business of the company.
• The company has to maintain high standards and quality of the product as it is involved in precision engineering. Minute errors in defence or space operations can cause a large hole in the pocket.
• A single project can turn out to be yearlong or more than that. Therefore, the company has high working capital requirements.
• Companies like Paras are valued based on their order book. Although the order book has expanded exponentially for these 2-3 years, it doesn’t guarantee that the book will grow at the same pace in the future.
• The company has to continuously invest in technology to stay updated with upcoming market trends. This makes R&D costs higher.
• The operating cash flows of the company are negative.

Conclusion

“Try to find blossoms in a desert”- is an ace quote from the (even more) ace fund manager Peter Lynch. Instead of running behind hot sectors like renewables, EVs, etc., try to find an attractive company in an unattractive industry.

PDSTL barely faces any competition in areas it operates in. Getting a contract with ISRO or the Indian Armed Forces is tough as they have very unbending requirements. But PDSTL has been a well-known customer of the government for decades. This customer relationship levers them from any new coming competition. For sure, this is a good company; but contrary to this, the only thing to think about is how fast order books will grow? Well, make of it what you will...

So, what do you think? Is Paras IPO a hit or a miss? Let us know the reasons in the comments below.​​​​​​​